Municipalities struggle to come up with 1.8b in tax refunds

Finnish taxpayers often opt to pay a higher income tax rate in order to get a tax refund at the year's end. This year, a record-breaking 3 billion euros will be refunded.

The eastern city of Kuopio is selling shares in its electricity company to fund this year's tax refunds.
Image: Yle

Municipalities across Finland have been caught out this year by a record-breaking sum of taxpayer refunds that will come due at the end of the year. Altogether about three billion euros will be returned, with municipalities responsible for refunding almost two thirds of this sum, or 1.8 billion euros.

"We can't come up with an explanation for it. It was a major surprise," says Benjamin Strandberg, a lawyer for the Association of Finnish Local and Regional Authorities.

Taxpayers in Finland receive a pre-completed tax return at the start of the year in which the tax administration proposes an estimate of their annual income and deductions. An increasing number of taxpayers opt to pay a higher withholding tax, meaning that a larger tax rate is withheld from their salaries, and increasing the likelihood that they will receive a tax refund at the end of the year.

Many of Finland's over 300 municipalities will to scramble to come up with the money to return the excess taxes to their rightful owners. The eastern city of Kuopio, for example, will be required to come up with over 44 million euros, a 17-million-euro rise on last year's tax refund. Over 400 municipal workers could be hired for a year with that amount of money.

"We will have to do some ownership restructuring this year, for example, we'll sell shares in the North Karelia Electricity Company. We have already come up with about 13 million euros from incidental transactions of this nature," Kuopio's financial planning chief Jaana Kuuva said.

Helsinki makes Kuopio's problems look small, however, as the capital city will have to cough up 253 million euros in tax refunds. Calculated together, all of the municipalities in the Uusimaa region will owe taxpayers 643 million euros by December.

The number of people receiving tax refunds has remained the same, but the sums being returned have risen by an average of 100 euros per taxpayer.

Taxman: people increasingly plan to get refunds

Finnish tax officials say that the trend among Finnish taxpayers has long been to report more income than they plan to earn in order to avoid paying back taxes.

"People want to 'save' in the form of arranging for a tax refund […] to have money for Christmas," says the Tax Administration's Sami Varonen.

Varonen says a growing number of taxpayers submit a revised tax card requesting a higher tax percentage. He says there has also been an increase in the amount of people who are claiming a tax credit for household expenses.

He suspects another reason people might be reporting their income incorrectly might be the government's competitive pact, which required people to do slightly more work each week for the same salary and cut civil servants' holiday pay.

"There was a lot of turbulence in 2017, with breakdowns in wage development that could have led the annual income of many salary groups to fall," the tax official said.